Lesson 1 of 4
What “going concern” means
Financial statements are prepared on the presumption that the company will keep operating, as a “going concern”. Accounting rules ask management to check whether that presumption is in doubt. Source 1
Every annual and quarterly period, management must evaluate whether conditions or events, taken together, raise substantial doubt about the company's ability to continue as a going concern within one year after the financial statements are issued. Source 1
Substantial doubt exists when it's probable that the company won't be able to meet its obligations as they come due within that year. Source 1
Lesson 2 of 4
Management's plans
Management can weigh its plans, such as raising money, borrowing, cutting costs or selling assets. The plans count only if it's probable they'll be carried out and will ease the problem. Source 1
If the plans ease the doubt, the notes to the financial statements still describe the conditions and the plans. If they don't, the notes must say plainly that substantial doubt exists. Source 1
Lesson 3 of 4
The auditor's paragraph
The auditor makes its own evaluation, over a reasonable period that doesn't exceed one year beyond the date of the financial statements it's auditing. Source 2
If substantial doubt remains after considering management's plans, the auditor adds an explanatory paragraph to its report, with its own heading, using the words “substantial doubt about its ability to continue as a going concern” or similar ones. Source 2
The auditor can't hedge that conclusion with conditional language. It can't say, for example, that there “may be” substantial doubt. Source 2
Lesson 4 of 4
Where it shows up, and what it doesn't say
You'll find the language in the notes to the financial statements and in the auditor's report in a 10-K. Companies may also discuss it in their risk factors and MD&A. Source 1 Source 2
It isn't a prediction. The auditing standard says auditors aren't responsible for predicting future conditions or events. Going-concern doubt is a judgment about roughly the next year, made with what was known then. Source 2
Its absence isn't a guarantee. The same standard says a report without the paragraph shouldn't be read as assurance that the company can continue as a going concern. Source 2
Compare with the company's earlier filings: is the language new, repeated or gone? Snoki's Filing Desk shows the old and new wording side by side when it changes.
To find it yourself, search for “substantial doubt” in EDGAR's full-text search. Source 3
Check yourself
Terms in this path
Sources
This guide explains how filings and data releases work. It isn't investment advice, and it never tells you to buy, sell or hold anything. Rules change: the linked sources are the final word.